Changes in Unemployment

To begin with, we ought to notice that unemployment is a stock -- a sort of "reserve army," to use the Marxist phrase. That is: a certain number of people are unemployed. More may "flow" into the "pool" of unemployed people in a given period of time, and some people may "flow" out. Unemployment may grow or decline depending on whether the flow in is greater than the flow out.

So we want to think in terms of the flows in and out of the unemployed group. Here's a picture to illustrate what we mean.

Figure 1: Flows Into and Out Of Unemployment

The figure shows the three groups in the population: the employed and the unemployed, who together make up the labor force, and the population not in the labor force.

The change in the number of people in the different groups will be determined by the flows into and out of the groups. The flows shown in the figure are:

Disemployment: This is the group of people who, within a period of time, lose or quit their jobs and begin looking for a new job, thus making the transition from employed status to unemployed status.
Retirement: This is the group of people who, within a period of time, lose or quit their jobs and choose not to look for a new job, thus making the transition from employed status to out of the labor force.
New Entrants: This is the group of people who, within a period of time, begin to look for jobs, thus making the transition from out of the labor force to unemployed.
Dropouts: This is the group of people who, within a period of time and after a period of job search, determine that they cannot get jobs on terms they find satisfactory, and so make the transition from unemployment to out of the labor force. We should keep in mind the distinction from "discouraged workers," who, although not actively job searching, would accept an offer "at the going wage" and so are "waiting" for a job, unemployed and in the labor force.
Recruits: This is the group of people who, within a period of time, get jobs without job search, recruited directly from outside the labor force, thus making the transition from out of the labor force to employed. This is probably a rather small group.
(Successful) job searchers: The last group in our list is the group of people who, within a period of time, make the transition from unemployed to employed status -- successful job searchers.

In any period, the increase in the number of unemployed people will be the calculated by:

new entrants + disemployment - successful job searchers - dropouts

If the number is negative, then unemployment decreases. We see that job search affects only one of the four flows that change unemployment, the transition from unemployed to employed status, although this is the most important flow out of unemployment. Thus, from the viewpoint of society, the "product" of job search is the number of people who move from "unemployed" to "employed" status. From an individual point of view, the productivity of job search is the probability of making that transition.

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